Treasury’s final auction of year draws highest yield since 2011

Treasury’s $29 billion seven-year note auction, the final government coupon sale of 2013, drew the highest yield in more than two years as the Federal Reserve plans to wrap up its bond-buying by the end of next year.

The notes drew a yield of 2.385%, the most since June 2011, exceeding a forecast of 2.374% in a Bloomberg News survey of seven of the Fed’s 21 primary dealers who are required to bid at the auctions. The bid-to-cover ratio, which gauges demand by comparing total bids with the amount of securities offered, was 2.45, trailing the average of 2.57 for the previous 10 sales.

The auction completed four note sales this week totaling $112 billion after the Fed said yesterday it will reduce monthly asset buying to $75 billion in January, from $85 billion this month.

“After the Fed’s announcement, the general bias for yields is higher,” said Adrian Miller, director of fixed-income strategies at GMP Securities LLC in New York. “Without Fed buying in the long end, there is some aversion to holding debt there. The question also remains, can the Fed execute an unwind of tapering without disrupting the market? And the jury is still out on that.”

Indirect bidders at the seven-year auction, a class of investors that includes foreign central banks, purchased 41.7% of the notes, versus an average of 40.3% at the past 10 sales.

Auction Detail

Direct bidders, non-primary-dealer investors that place their bids directly with the Treasury, bought 17.1%, compared with the 19.1% average at the past 10 auctions.

The central bank left unchanged yesterday its statement that it will probably hold its target interest rate near zero “at least as long as” unemployment exceeds 6.5%, so long as the outlook for inflation is no higher than 2.5%.

“The cat is out of the bag with the Fed news, and that has left the greater risk of higher yields on the long end, even as the short end is supported,” said David Ader, head of U.S. government-bond strategy at CRT Capital Group LLC in Stamford, Connecticut. “The tapering process is underway, and if data continue to get better, the acceleration in tapering will continue, which argues for a more bearish outlook.”

Policy makers have maintained the benchmark rate, the target for overnight loans between banks, at zero to 0.25% since 2008 to support the economy. A majority of FOMC participants -- 12 out of 17 -- in economic projections released today saw the first increase in the rate in 2015.